East India Company and Modern Corporations

William Dalrymple has an interesting
piece in the Guardian that compares the East India Company (EIC) with
modern corporations. He seeks to demonstrate that some of the factors that
perpetuated the EIC’s dominance in the corporate and political world for
several centuries are found in modern corporations as well, albeit in more
measured terms. The kind of power that was wielded by the EIC is unrivalled by what
the most powerful corporations presently carry. Although the piece is a bit
long, I would recommend it to readers interested in the history and politics of
the corporate world.

Some aspects are worth mentioning.
The first is the relationship between the state and the corporate sector that
is somewhat snug, but often also tends to become tenuous. The EIC benefited
directly from monopoly conferred by the state, which is unimaginable in present
circumstances, but as Dalrymple argues, that phenomenon exists rather covertly
at the moment:

In many ways the
EIC was a model of corporate efficiency: 100 years into its history, it had
only 35 permanent employees in its head office. Nevertheless, that skeleton
staff executed a corporate coup unparalleled in history: the military conquest,
subjugation and plunder of vast tracts of southern Asia. It almost certainly
remains the supreme act of corporate violence in world history. For all the
power wielded today by the world’s largest corporations – whether ExxonMobil,
Walmart or Google – they are tame beasts compared with the ravaging territorial
appetites of the militarised East India Company. Yet if history shows anything,
it is that in the intimate dance between the power of the state and that of the
corporation, while the latter can be regulated, it will use all the resources
in its power to resist.

The second is the
shareholder-oriented approach of the EIC, where it operated largely for the
benefit of shareholders, without regard (and often counter) to any other
constituencies whatsoever. Matters became further compounded due to the
unsavory linkages between lawmakers and the corporates whereby several MPs who
continued to support EIC’s dominance also turned out to be shareholders in the
company. As Dalrymple notes:

When it suited,
the EIC made much of its legal separation from the government. It argued
forcefully, and successfully, that the document signed by Shah Alam – known as
the Diwani – was the legal property of the company, not the Crown, even though
the government had spent a massive sum on naval and military operations
protecting the EIC’s Indian acquisitions. But the MPs who voted to uphold this
legal distinction were not exactly neutral: nearly a quarter of them held
company stock, which would have plummeted in value had the Crown taken over.
For the same reason, the need to protect the company from foreign competition
became a major aim of British foreign policy.

This also suggests rent-seeking
behaviour on the part of the state and the legislators. The fact of utter
disregard to non-shareholder interests is evident from the following passage:

The transaction
depicted in the painting was to have catastrophic consequences. As with all
such corporations, then as now, the EIC was answerable only to its
shareholders. With no stake in the just governance of the region, or its
long-term wellbeing, the company’s rule quickly turned into the straightforward
pillage of Bengal, and the rapid transfer westwards of its wealth.

As a third aspect, Dalrymple also
identifies elements of corporate crisis and bailouts in EIC’s history and
compares that with the current scenario.

Yet, like more
recent mega-corporations, the EIC proved at once hugely powerful and oddly
vulnerable to economic uncertainty. Only seven years after the granting of the
Diwani, when the company’s share price had doubled overnight after it acquired
the wealth of the treasury of Bengal, the East India bubble burst after plunder
and famine in Bengal led to massive shortfalls in expected land revenues. The
EIC was left with debts of £1.5m and a bill of £1m unpaid tax owed to the
Crown. When knowledge of this became public, 30 banks collapsed like dominoes
across Europe, bringing trade to a standstill.

…

But unlike Lehman
Brothers, the East India Company really was too big to fail. So it was that in
1773, the world’s first aggressive multinational corporation was saved by
history’s first mega-bailout – the first example of a nation state extracting,
as its price for saving a failing corporation, the right to regulate and
severely rein it in.

The piece deals with several other
aspects of EIC and historically accounts them in detail. It ends with the
following observation:

The East India
Company no longer exists, and it has, thankfully, no exact modern equivalent.
Walmart, which is the world’s largest corporation in revenue terms, does not
number among its assets a fleet of nuclear submarines; neither Facebook nor
Shell possesses regiments of infantry. Yet the East India Company – the first
great multinational corporation, and the first to run amok – was the ultimate
model for many of today’s joint-stock corporations. The most powerful among
them do not need their own armies: they can rely on governments to protect
their interests and bail them out. The East India Company remains history’s
most terrifying warning about the potential for the abuse of corporate power –
and the insidious means by which the interests of shareholders become those of
the state. Three hundred and fifteen years after its founding, its story has
never been more current.

It appears this piece is a
precursor to Dalrymple’s forthcoming book, The
Anarchy: How a Corporation Replaced the Mughal Empire, 1756-1803, expected
next year, and something to look out for anyone interested in corporate history.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

Many of the links on this blog will take you to sites operated by third parties. The contributors of this blog have not reviewed all of the information on these sites or the accuracy or reliability of any information, data, opinions, advice, or statements on these sites. The contributors do not endorse these sites, or opinions they may offer. These third-party links are offered solely for the purpose of discussion and thinking on Indian corporate law and other related topics. It is also possible that some of the pages linked may become inactive after the lapse of a period of time.